Straining at the shackles of partnership

If you were a partner in Andersen today, how would you feel about partnership as a form of governance for professional firms? How would you feel about partnership as you watch your equity sink faster than a broken heart, because of something several of your partners, whom you may not even have known, did in an office you may never have visited? It shivers the timbers to think about it. Andersen partners who were far removed from Enron will probably lose thousands of dollars each in equity investment in the firm, at least as a result of lawsuits, and possibly more as a result of indictments. The arguments for reconsidering the partnership structure are, now, more compelling than ever. To those arguments and others set forth in the past, the Andersen situation generates a greater urgency. I have long questioned, in these pages and elsewhere, the viability of partnership as a form of governance in the 21st century. The arguments for reconsidering the partnership structure are now more compelling than ever before - and not solely because of the Andersen debacle. Clearly, the traditional values of the partnership - the collegiality, profitability, sharing of risk and, as the leading partner of the English brokerage firm Cazanove pointed out, "... the implicit intergenerational contract ... the goodwill, reputation and accumulated knowledge of the firm that are handed down from one generation to the next" - are eroding. The structure is simply not responsive to the needs of the emerging marketplace for today’s professional services and is, in fact, becoming downright dangerous. It precludes the values most needed today - the ability to compete, to manage for profit while still keeping the independence and integrity, the ability to manage information. What must evolve, then, is a new kind of organization, beyond the current partnership structure, and beyond even the limited liability partnership. It must be devised to deal with the exigencies of contemporary and future business needs, while still retaining the foundation for probity, objectivity and professionalism that is required of the profession by both government and business. Four major factors are eclipsing (but not eliminating) the traditional concerns about the independence and objectivity of the audit, as well as the "warm milk" comfort of the public’s need for professional help to comply with a growing list of regulatory constraints. These four factors are professional management, technology, the nature and culture of the partnership itself and the capital requirements for growth and the ability to compete. First and foremost is the need for professional management. Corporate executives are most often trained professional managers. Accountants or lawyers, no matter how bright or intuitive, are not. When the accounting profession consisted essentially of the audit, taxes and a small measure of consulting services, when information flowed slowly, the structure needed to manage the practice was relatively simple. Those were the days before the need to compete loomed so large in the practice - when professional practice consisted entirely of performing those services required by law, or demanded by the clients’ traditional exigencies of running a company. But as the needs of the clientele changed, fanned by the promise of more complex and useful services by the entrepreneurial and competitive professional firms, so too did the response of the progressive firms become more complex. More services. More outreach. Better attempts to understand the market, and to build structures to relate to the changes in the market. Those firms that learned how to hear and respond to the new rhythms of the marketplace and to new technology thrived. Those that didn’t hear well, or didn’t respond more readily, either went out of business or merged, which is one reason that the Big Eight became the Big Five. The accounting profession moved from the accounting and tax business to the business business. As clients were offered more services, they demanded even more, until the most successful firms were those that went beyond the supplier’s role to participate in their clients’ planning and strategy, offering a range of capabilities that scarcely existed before. Once the heart and soul of the profession, accounting, auditing and tax services have become a smaller part of a larger practice. Increasingly, the range of services includes guidance in business skills and strategies, technical services, personal financial planning, assistance in globalization for even the smallest companies, estate planning and legal services in designated areas. Now, the word accountant rarely appears in advertising. That this process has gone too far is evident in the outcry to separate the auditor from the consultant as a fix for the Enron mess. This is a reaction - not always rational - that arises more from the inability to manage the complex structures that we see today than from any real danger in the integrated firm itself. Unfortunately, the skills that once made senior partners so valuable to their firms do not often include management skills, particularly those that are needed in a highly competitive environment. Where, in even the largest partnerships, is the training in finding, qualifying and managing people of diverse skills and talents? In managing skills that are not traditional to the accounting or legal profession? In understanding the nuances of the marketplace? In developing internal communications skills to deal with the vast and complex body of information needed to run today’s firm? In using the new technology wisely and effectively as a management tool? In dealing on a global scale for even the smallest clients, and managing those who do know how to do it? In raising and managing capital for growth and expansion? In this complex and fast-paced environment, with its new technology and array of services, can a contemporary firm be managed by an elected peer, with limited management training and experience? In a complex environment, are the classic rainmaking skills that once defined the managing partner sufficient to help contemporary firms compete? The second factor, technology, has also driven the traditional compliance and attest skills - the audit and tax preparation - closer to the commodity column. Technology alters the very nature of financial reporting by changing the essence of financial information from the static, dated financial statement to the instant access of dynamic information. And when the access changes the nature of the information itself, then traditional accounting practices must change. But they haven’t, which makes the traditional audit practice something of an anachronism in many respects. Ultimately, a burgeoning amount of information is needed to serve the needs of the market, particularly in a competitive environment, and a partnership, unlike a corporation, is not geared to gather, distill and distribute information in ways that make it most useful. The collegial partnership structure has repeatedly shown that it can’t function fast enough, nor make decisions handily enough, to meet the needs of changing times. The internal information systems, and the knowledge management systems, still reside in the mechanics of moving data, rather than in managing content. The third factor that has changed the environment is the partnership structure itself. It’s driven as much by culture as by the demands of sound business. The traditional professional firm has been run for its partners, not its staff. But to accommodate new and better people as partners, there had to be more business than could be derived from traditional practices. How many new audit clients can a Big Five firm get from the Fortune 500 group? Not enough to build a major practice without new sources of business. Now, clients come in pursuit of new kinds of help - and in response to new services. The need for new business skills still proliferates. The firm that resides in the expertise of its partners alone now finds itself inflexible, unable to summon up the many skills that are needed to serve clients. It precludes the valuable input of non-accountants. But today’s firm must now draw on the skills of personnel who may not be CPAs or even lawyers, or who may not be partner material for reasons beyond skill. Many new firms have begun to eliminate the ancient rite of partnership-path-or-out, and now welcome specialists whom they accept as contributors to their business, and not as potential partners.